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SILICON VALLEY BANK                                                 EXHIBIT 10.1

                                 SCHEDULE TO

                          LOAN AND SECURITY AGREEMENT

                                        
BORROWER:   TERAYON COMMUNICATION SYSTEMS, INC.
ADDRESS:    2952 BUNKER HILL LANE
            SANTA CLARA, CALIFORNIA  95054

DATE:       AUGUST 10, 1998



THIS LOAN AND SECURITY AGREEMENT is entered into on the above date between
SILICON VALLEY BANK,  COMMERCIAL FINANCE DIVISION ("Silicon"), whose address is
3003 Tasman Drive, Santa Clara, California  95054 and the borrower(s) named
above (jointly and severally, the "Borrower"), whose chief executive office is
located at the above address ("Borrower's Address").  The Schedule to this
Agreement (the "Schedule") shall for all purposes be deemed to be a part of this
Agreement, and the same is an integral part of this Agreement.  (Definitions of
certain terms used in this Agreement are set forth in Section 8 below.)


1.  LOANS.

  1.1  LOANS.  Silicon will make loans to Borrower (the "Loans"), in amounts
determined by Silicon in its sole discretion, up to the amounts (the "Credit
Limit") shown on the Schedule, provided no Default or Event of Default has
occurred and is continuing, and subject to deduction of any Reserves for accrued
interest and such other Reserves as Silicon deems proper from time to time.

  1.2  INTEREST.  All Loans and all other monetary Obligations shall bear
interest at the rate shown on the Schedule, except where expressly set forth to
the contrary in this Agreement.  Interest shall be payable monthly, on the last
day of the month.  Interest may, in Silicon's discretion, be charged to
Borrower's loan account, and the same shall thereafter bear interest at the same
rate as the other Loans.  Silicon may, in its discretion, charge interest to
Borrower's Deposit Accounts maintained with Silicon.  

  1.3  OVERADVANCES.  If at any time or for any reason the total of all
outstanding Loans and all other Obligations exceeds the Credit Limit (an
"Overadvance"), Borrower shall immediately pay the amount of the excess to
Silicon, without notice or demand.  Without limiting Borrower's obligation to
repay to Silicon on demand the amount of any Overadvance, Borrower agrees to pay
Silicon interest on the outstanding amount of any Overadvance, on demand, at a
rate equal to the interest rate which would otherwise be applicable to the
Overadvance, plus an additional 2% per annum.

  1.4  FEES.  Borrower shall pay Silicon the fee(s) shown on the Schedule, which
are in addition to all interest and other sums payable to Silicon and are not
refundable.

  1.5  LETTERS OF CREDIT.  [Not Applicable]

2.  SECURITY INTEREST.

  2.1  SECURITY INTEREST.  To secure the payment and performance of all of the
Obligations when due, Borrower hereby grants to Silicon a security interest in
all of Borrower's interest in the following, whether now owned or hereafter
acquired, and wherever located (collectively, the "Collateral"):  All Inventory,
Equipment, Receivables, and General Intangibles, including, without limitation,
all of Borrower's Deposit Accounts, and all money, and all property now or at
any time in the future in Silicon's possession (including claims and credit
balances), and all proceeds (including proceeds of any insurance policies,
proceeds of proceeds and claims against third parties), all products and all
books and records related to any of the foregoing (all of the foregoing,
together with all other property in which Silicon may now or in the future be
granted a lien or security interest, is referred to herein, collectively, as the
"Collateral"). Notwithstanding the foregoing provisions, the term "Collateral"
shall not include the following (the "Nonassignable Rights") any general
intangibles of Borrower consisting of licenses under which Borrower is a
licensee, to the extent that (i) such general intangibles are not assignable
or capable of being 

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encumbered as a matter of law or under the terms of the license or other
agreement applicable thereto (but solely to the extent that any such
restriction shall be enforceable under applicable law), without the consent of
the licensor thereof and (ii) such consent has not been obtained; provided,
however, that, in all events, the foregoing grant of security interest shall
extend to, and the term "Collateral" shall include (A) any general intangible
which is a Receivable or a proceed of, or otherwise related to the enforcement
or collection of, any Receivable, or goods which are the subject of any
Receivable, (B) any and all proceeds of any general intangibles which are
otherwise excluded, and (C) upon obtaining the consent of any such licensor or
other applicable party's consent with respect to any such otherwise excluded
general intangibles, such general intangibles as well as any and all proceeds
thereof that might have theretofore been excluded from such grant of a
security interest and the term "Collateral". Borrower warrants that on the
date hereof there are no Nonassignable Rights, except as set forth on Exhibit
A hereto.

3.  REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE BORROWER.

  In order to induce Silicon to enter into this Agreement and to make Loans,
Borrower represents and warrants to Silicon as follows, and Borrower covenants
that the following representations will continue to be true, and that Borrower
will at all times comply with all of the following covenants:

  3.1  CORPORATE EXISTENCE AND AUTHORITY.  Borrower, if a corporation, is and
will continue to be, duly organized, validly existing and in good standing
under the laws of the jurisdiction of its incorporation. Borrower is and will
continue to be qualified and licensed to do business in all jurisdictions in
which any failure to do so would have a material adverse effect on Borrower.
The execution, delivery and performance by Borrower of this Agreement, and all
other documents contemplated hereby (i) have been duly and validly authorized,
(ii) are enforceable against Borrower in accordance with their terms (except
as enforcement may be limited by equitable principles and by bankruptcy,
insolvency, reorganization, moratorium or similar laws relating to creditors'
rights generally), and (iii) do not violate Borrower's articles or certificate
of incorporation, or Borrower's by-laws, or any law or any material agreement
or instrument which is binding upon Borrower or its property, and (iv) do not
constitute grounds for acceleration of any material indebtedness or obligation
under any material agreement or instrument which is binding upon Borrower or
its property.

  3.2  NAME; TRADE NAMES AND STYLES.  The name of Borrower set forth in the
heading to this Agreement is its correct name. Listed on the Schedule are all
prior names of Borrower and all of Borrower's present and prior trade names.
Borrower shall give Silicon 30 days' prior written notice before changing its
name or doing business under any other name. Borrower has complied, and will
in the future comply, with all laws relating to the conduct of business under
a fictitious business name.

  3.3  PLACE OF BUSINESS; LOCATION OF COLLATERAL.  The address set forth in the
heading to this Agreement is Borrower's chief executive office. In addition,
Borrower has places of business and Collateral is located only at the
locations set forth on the Schedule. Borrower will give Silicon at least 30
days prior written notice before opening any additional place of business,
changing its chief executive office, or moving any of the Collateral to a
location other than Borrower's Address or one of the locations set forth on
the Schedule.

  3.4  TITLE TO COLLATERAL; PERMITTED LIENS.  Borrower is now, and will at all
times in the future be, the sole owner of all the Collateral, except for items
of Equipment which are leased by Borrower. The Collateral now is and will
remain free and clear of any and all liens, charges, security interests,
encumbrances and adverse claims, except for Permitted Liens. Silicon now has,
and will continue to have, a first-priority perfected and enforceable security
interest in all of the Collateral, subject only to the Permitted Liens, and
Borrower will at all times defend Silicon and the Collateral against all
claims of others. None of the Collateral now is or will be affixed to any real
property in such a manner, or with such intent, as to become a fixture.
Borrower is not and will not become a lessee under any real property lease
pursuant to which the lessor may obtain any rights in any of the Collateral
and no such lease now prohibits, restrains, impairs or will prohibit, restrain
or impair Borrower's right to remove any Collateral from the leased premises.
Whenever any Collateral is located upon premises in which any third party has
an interest (whether as owner, mortgagee, beneficiary under a deed of trust,
lien or otherwise), Borrower shall, whenever requested by Silicon, use its
best efforts to cause such third party to execute and deliver to Silicon, in
form acceptable to Silicon, such waivers and subordinations as Silicon shall
specify, so as to ensure that Silicon's rights in the Collateral are, and will
continue to be, superior to the rights of any such third party. Borrower will
keep in full force and effect, and will comply with all the terms of, any
lease of real property where any of the Collateral now or in the future may be
located.

  3.5  MAINTENANCE OF COLLATERAL.  Borrower will maintain the Collateral in
good working condition, and Borrower will not use the Collateral for any
unlawful purpose. Borrower will immediately advise Silicon in writing of any
material loss or damage to the Collateral.

  3.6  BOOKS AND RECORDS.  Borrower has maintained and will maintain at
Borrower's Address complete and accurate books and records, comprising an
accounting system in accordance with generally accepted accounting principles.

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  3.7  FINANCIAL CONDITION, STATEMENTS AND REPORTS.  All financial statements
now or in the future delivered to Silicon have been, and will be, prepared in
conformity with generally accepted accounting principles and now and in the
future will completely and accurately reflect the financial condition of
Borrower, at the times and for the periods therein stated. Between the last
date covered by any such statement provided to Silicon and the date hereof,
there has been no material adverse change in the financial condition or
business of Borrower. Borrower is now and will continue to be solvent.

  3.8  TAX RETURNS AND PAYMENTS; PENSION CONTRIBUTIONS.  Borrower has timely
filed, and will timely file, all tax returns and reports required by foreign,
federal, state and local law, and Borrower has timely paid, and will timely pay,
all foreign, federal, state and local taxes, assessments, deposits and
contributions now or in the future owed by Borrower. Borrower may, however,
defer payment of any contested taxes, provided that Borrower (i) in good faith
contests Borrower's obligation to pay the taxes by appropriate proceedings
promptly and diligently instituted and conducted, (ii) notifies Silicon in
writing of the commencement of, and any material development in, the
proceedings, and (iii) posts bonds or takes any other steps required to keep the
contested taxes from becoming a lien upon any of the Collateral. Borrower is
unaware of any claims or adjustments proposed for any of Borrower's prior tax
years which could result in additional taxes becoming due and payable by
Borrower. Borrower has paid, and shall continue to pay all amounts necessary
to fund all present and future pension, profit sharing and deferred
compensation plans in accordance with their terms, and Borrower has not and
will not withdraw from participation in, permit partial or complete
termination of, or permit the occurrence of any other event with respect to,
any such plan which could result in any liability of Borrower, including any
liability to the Pension Benefit Guaranty Corporation or its successors or any
other governmental agency. Borrower shall, at all times, utilize the services
of an outside payroll service providing for the automatic deposit of all
payroll taxes payable by Borrower.

  3.9  COMPLIANCE WITH LAW.  Borrower has complied, and will comply, in all
material respects, with all provisions of all foreign, federal, state and local
laws and regulations relating to Borrower, including, but not limited to, those
relating to Borrower's ownership of real or personal property, the conduct and
licensing of Borrower's business, and all environmental matters.

  3.10 LITIGATION.  Except as disclosed in the Schedule, there is no claim,
suit, litigation, proceeding or investigation pending or (to best of Borrower's
knowledge) threatened by or against or affecting Borrower in any court or before
any governmental agency (or any basis therefor known to Borrower) which may
result, either separately or in the aggregate, in any material adverse change in
the financial condition or business of Borrower, or in any material impairment
in the ability of Borrower to carry on its business in substantially the same
manner as it is now being conducted.  Borrower will promptly inform Silicon in
writing of any claim, proceeding, litigation or investigation in the future
threatened or instituted by or against Borrower involving any single claim of
$50,000 or more, or involving $100,000  or more in the aggregate.

  3.11 USE OF PROCEEDS.  All proceeds of all Loans shall be used solely for
lawful business purposes.  Borrower is not purchasing or carrying any "margin
stock" (as defined in Regulation U of the Board of Governors of the Federal
Reserve System) and no part of the proceeds of any Loan will be used to purchase
or carry any "margin stock" or to extend credit to others for the purpose of
purchasing or carrying any "margin stock."

4.  RECEIVABLES.

  4.1  REPRESENTATIONS RELATING TO RECEIVABLES.  Borrower represents and
warrants to Silicon as follows:  Each Receivable with respect to which Loans are
requested by Borrower shall, on the date each Loan is requested and made, (i)
represent an undisputed bona fide existing unconditional obligation of the
Account Debtor created by the sale, delivery, and acceptance of goods or the
rendition of services in the ordinary course of Borrower's business, and (ii)
meet the Minimum Eligibility Requirements set forth in  Section 8 below.

  4.2  REPRESENTATIONS RELATING TO DOCUMENTS AND LEGAL COMPLIANCE.  Borrower
represents and warrants to Silicon as follows:  All statements made and all
unpaid balances appearing in all invoices, instruments and other documents
evidencing the Receivables are and shall be true and correct and all such
invoices, instruments and other documents and all of Borrower's books and
records are and shall be genuine and in all respects what they purport to be,
and all signatories and endorsers on behalf of Borrower have the capacity to
contract. All sales and other transactions underlying or giving rise to each
Receivable shall fully comply with all applicable laws and governmental rules
and regulations. To the best of Borrower's knowledge, all signatures and
endorsements on all documents, instruments, and agreements relating to all
Receivables are and shall be genuine, and all such documents, instruments and
agreements are and shall be legally enforceable in accordance with their
terms.

  4.3  SCHEDULES AND DOCUMENTS RELATING TO RECEIVABLES.  Borrower shall deliver
to Silicon transaction reports and loan requests, schedules and assignments of
all Receivables, and schedules of collections, all on Silicon's standard forms;
provided, however, that Borrower's failure to execute and deliver the same shall
not affect or limit Silicon's security interest and other rights in all of
Borrower's Receivables, nor shall Silicon's failure to advance or lend against a
specific Receivable affect or limit Silicon's security interest and other rights
therein.  Loan requests received after 12:00 Noon will not be considered by
Silicon until the next Business Day.  Together with 

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each such schedule and assignment, or later if requested by Silicon, Borrower
shall furnish Silicon with copies (or, at Silicon's request, originals) of all
contracts, orders, invoices, and other similar documents, and all original
shipping instructions, delivery receipts, bills of lading, and other evidence
of delivery, for any goods the sale or disposition of which gave rise to such
Receivables, and Borrower warrants the genuineness of all of the foregoing.
Borrower shall also furnish to Silicon an aged accounts receivable trial
balance in such form and at such intervals as Silicon shall request. In
addition, if necessary to perfect Silicon's security interest, or if an Event
of Default has occurred and is continuing, Borrower shall deliver to Silicon
the originals of all instruments, chattel paper, security agreements,
guarantees and other documents and property evidencing or securing any
Receivables, immediately upon receipt thereof and in the same form as
received, with all necessary indorsements, all of which shall be with
recourse. Borrower shall also provide Silicon with copies of all credit memos
within two days after the date issued.
  
  4.4  COLLECTION OF RECEIVABLES.  Borrower shall have the right to collect all
Receivables, unless and until a Default or an Event of Default has occurred.
Borrower shall hold all payments on, and proceeds of, Receivables in trust for
Silicon, and Borrower shall immediately deliver all such payments and proceeds
to Silicon in their original form, duly endorsed in blank, to be applied to
the Obligations in such order as Silicon shall determine and in the event the
monetary Obligations have been reduced to zero, Silicon shall remit any excess
to Borrower. Silicon may, in its discretion, require that all proceeds of
Collateral be deposited by Borrower into a lockbox account, or such other
"blocked account" as Silicon may specify, pursuant to a blocked account
agreement in such form as Silicon may specify. Silicon or its designee may, at
any time, notify Account Debtors that the Receivables have been assigned to
Silicon.
  
  4.5.  REMITTANCE OF PROCEEDS.  All proceeds arising from the disposition of
any Collateral shall be delivered, in kind, by Borrower to Silicon in the
original form in which received by Borrower not later than the following
Business Day after receipt by Borrower, to be applied to the Obligations in such
order as Silicon shall determine; provided that, if no Default or Event of
Default has occurred, Borrower shall not be obligated to remit to Silicon the
proceeds of the sale of worn out or obsolete equipment disposed of by Borrower
in good faith in an arm's length transaction for an aggregate purchase price of
$25,000 or less (for all such transactions in any fiscal year).  Borrower agrees
that it will not commingle proceeds of Collateral with any of Borrower's other
funds or property, but will hold such proceeds separate and apart from such
other funds and property and in an express trust for Silicon.  Nothing in this
Section limits the restrictions on disposition of Collateral set forth elsewhere
in this Agreement.

  4.6  DISPUTES.  Borrower shall notify Silicon promptly of all disputes or
claims relating to Receivables.  Borrower shall not forgive (completely or
partially), compromise or settle any Receivable for less than payment in full,
or agree to do any of the foregoing, except that Borrower may do so, provided
that: (i) Borrower does so in good faith, in a commercially reasonable manner,
in the ordinary course of business, and in arm's length transactions, which are
reported to Silicon on the regular reports provided to Silicon; (ii) no Default
or Event of Default has occurred and is continuing; and (iii) taking into
account all such discounts settlements and forgiveness, the total outstanding
Loans will not exceed the Credit Limit.  Silicon may, at any time after the
occurrence and during the continuance of an Event of Default, settle or adjust
disputes or claims directly with Account Debtors for amounts and upon terms
which Silicon considers advisable in its reasonable credit judgment and, in
all cases, Silicon shall credit Borrower's Loan account with only the net
amounts received by Silicon in payment of any Receivables.

  4.7  RETURNS.  Provided no Event of Default has occurred and is continuing, if
any Account Debtor returns any Inventory to Borrower in the ordinary course of
its business, Borrower shall promptly determine the reason for such return and
promptly issue a credit memorandum to the Account Debtor in the appropriate
amount (sending a copy to Silicon).  In the event any attempted return occurs
after the occurrence and during the continuance of any Event of Default,
Borrower shall (i) hold the returned Inventory in trust for Silicon, (ii)
segregate all returned Inventory from all of Borrower's other property, (iii)
conspicuously label the returned Inventory as Silicon's property, and (iv)
immediately notify Silicon of the return of any Inventory, specifying the
reason for such return, the location and condition of the returned Inventory,
and on Silicon's request deliver such returned Inventory to Silicon.

  4.8  VERIFICATION.  Silicon may, from time to time, verify directly with the
respective Account Debtors the validity, amount and other matters relating to
the Receivables, by means of mail, telephone or otherwise, either in the name of
Borrower or Silicon or such other name as Silicon may choose.

  4.9  NO LIABILITY.  Silicon shall not under any circumstances be responsible
or liable for any shortage or discrepancy in, damage to, or loss or destruction
of, any goods, the sale or other disposition of which gives rise to a
Receivable, or for any error, act, omission, or delay of any kind occurring in
the settlement, failure to settle, collection or failure to collect any
Receivable, or for settling any Receivable in good faith for less than the full
amount thereof, nor shall Silicon be deemed to be responsible for any of
Borrower's obligations under any contract or agreement giving rise to a
Receivable.

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Nothing herein shall, however, relieve Silicon from liability for its own
gross negligence or willful misconduct.

5.  ADDITIONAL DUTIES OF THE BORROWER.

  5.1  FINANCIAL AND OTHER COVENANTS.  Borrower shall at all times comply with
the financial and other covenants set forth in the Schedule.

  5.2  INSURANCE.  Borrower shall, at all times insure all of the tangible
personal property Collateral and carry such other business insurance, with
insurers reasonably acceptable to Silicon, in such form and amounts as Silicon
may reasonably require, and Borrower shall provide evidence of such insurance to
Silicon, so that Silicon is satisfied that such insurance is, at all times, in
full force and effect.  All such insurance policies shall name Silicon as an
additional loss payee, and shall contain a lenders loss payee endorsement in
form reasonably acceptable to Silicon.  Upon receipt of the proceeds of any such
insurance, Silicon shall apply such proceeds in reduction of the Obligations as
Silicon shall determine in its sole discretion, except that, provided no Default
or Event of Default has occurred and is continuing, Silicon shall release to
Borrower insurance proceeds with respect to Equipment totaling less than 
$200,000, which shall be utilized by Borrower for the replacement of the
Equipment with respect to which the insurance proceeds were paid.  Silicon may
require reasonable assurance that the insurance proceeds so released will be so
used.  If Borrower fails to provide or pay for any insurance, Silicon may, but
is not obligated to, obtain the same at Borrower's expense.  Borrower shall
promptly deliver to Silicon copies of all reports made to insurance companies.

  5.3  REPORTS.  Borrower, at its expense, shall provide Silicon with the
written reports set forth in the Schedule, and such other written reports with
respect to Borrower (including budgets, sales projections, operating plans and
other financial documentation), as Silicon shall from time to time reasonably
specify.

  5.4  ACCESS TO COLLATERAL, BOOKS AND RECORDS.  At reasonable times, and on one
Business Day's notice, Silicon, or its agents, shall have the right to inspect
the Collateral, and the right to audit and copy Borrower's books and records.
Silicon shall take reasonable steps to keep confidential all information
obtained in any such inspection or audit, but Silicon shall have the right to
disclose any such information to its auditors, regulatory agencies, and
attorneys, and pursuant to any subpoena or other legal process.  The foregoing
inspections and audits shall be at Borrower's expense and the charge therefor
shall be $500 per person per day (or such higher amount as shall represent
Silicon's then current standard charge for the same), plus reasonable out of
pocket expenses.  Borrower will not enter into any agreement with any accounting
firm, service bureau or third party to store Borrower's books or records at any
location other than Borrower's Address, without first obtaining Silicon's
written consent, which may be conditioned upon such accounting firm, service
bureau or other third party agreeing to give Silicon the same rights with
respect to access to books and records and related rights as Silicon has under
this Loan Agreement.  Borrower waives the benefit of any accountant-client
privilege or other evidentiary privilege precluding or limiting the disclosure,
divulgence or delivery of any of its books and records (except that Borrower
does not waive any attorney-client privilege).

  5.5  NEGATIVE COVENANTS.  Except as may be permitted in the Schedule, Borrower
shall not, without Silicon's prior written consent, do any of the following:
(i) merge or consolidate with another corporation or entity; (ii) acquire any
assets, except in the ordinary course of business; (iii) enter into any other
transaction outside the ordinary course of business; (iv) sell or transfer any
Collateral, except for the sale of finished Inventory in the ordinary course of
Borrower's business, and except for the sale of obsolete or unneeded Equipment
in the ordinary course of business; (v) store any Inventory or other Collateral
with any warehouseman or other third party; (vi) sell any Inventory on a sale-
or-return, guaranteed sale, consignment, or other contingent basis; (vii) make
any loans of any money or other assets except for loans to employees in the
ordinary course of business in an aggregate amount outstanding at any one time
not to exceed $200,000; (viii) incur any debts, outside the ordinary course
of business, which would have a material, adverse effect on Borrower or on the
prospect of repayment of the Obligations; (ix) guarantee or otherwise become
liable with respect to the obligations of another party or entity; (x) pay or
declare any dividends on Borrower's stock (except for dividends payable solely
in stock of Borrower); (xi) redeem, retire, purchase or otherwise acquire,
directly or indirectly, any of Borrower's stock except for stock repurchases
in connection with agreements that permit Borrower to repurchase shares upon
termination of services to Borrower or in exercise of Borrower's right of
first refusal upon a proposed transfer, provided that the aggregate paid in
all of the foregoing transactions shall not exceed $100,000 in the aggregate
in any fiscal year; (xii) make any change in Borrower's capital structure
which would have a material adverse effect on Borrower or on the prospect of
repayment of the Obligations; or (xiii) or (xiv) dissolve or elect to
dissolve. Transactions permitted by the foregoing provisions of this Section
are only permitted if no Default or Event of Default would occur as a result
of such transaction.

  5.6  LITIGATION COOPERATION.  Should any third-party suit or proceeding be
instituted by or against Silicon with 

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respect to any Collateral or in any manner relating to Borrower, Borrower
shall, without expense to Silicon, make available Borrower and its officers,
employees and agents and Borrower's books and records, to the extent that
Silicon may deem them reasonably necessary in order to prosecute or defend any
such suit or proceeding.

  5.7  FURTHER ASSURANCES.  Borrower agrees, at its expense, on request by
Silicon, to execute all documents and take all actions, as Silicon, may deem
reasonably necessary or useful in order to perfect and maintain Silicon's
perfected security interest in the Collateral, and in order to fully consummate
the transactions contemplated by this Agreement.

6.  TERM.

  6.1  MATURITY DATE.  This Agreement shall continue in effect until the
maturity date set forth on the Schedule (the "Maturity Date"); provided that the
Maturity Date shall automatically be extended, and this Agreement shall
automatically and continuously renew, for successive additional terms of one
year each, unless one party gives written notice to the other, not less than
sixty days prior to the next Maturity Date, that such party elects to terminate
this Agreement effective on the next Maturity Date.

  6.2  EARLY TERMINATION.  This Agreement may be terminated prior to the
Maturity Date as follows:  (i) by Borrower, effective three Business Days after
written notice of termination is given to Silicon; or (ii) by Silicon at any
time after the occurrence of an Event of Default, without notice, effective
immediately.  If this Agreement is terminated by Borrower or by Silicon under
this Section 6.2, Borrower shall pay to Silicon a termination fee in an amount
equal to $50,000 if termination occurs on or before the first anniversary of
the date of this Agreement, and $25,000 if termination occurs after the first
anniversary of the date of this Agreement and on or before the second
anniversary of the date of this Agreement. No termination fee shall be charged
if the Obligations are paid in full from the proceeds of loans made by another
lending division of Silicon. The termination fee shall be due and payable on the
effective date of termination and thereafter shall bear interest at a rate equal
to the highest rate applicable to any of the Obligations.

  6.3  PAYMENT OF OBLIGATIONS.  On the Maturity Date or on any earlier effective
date of termination, Borrower shall pay and perform in full all Obligations,
whether evidenced by installment notes or otherwise, and whether or not all or
any part of such Obligations are otherwise then due and payable.  Without
limiting the generality of the foregoing, if on the Maturity Date,  or on any
earlier effective date of termination, there are any outstanding Letters of
Credit issued by Silicon or issued by another institution based upon an
application, guarantee, indemnity or similar agreement on the part of Silicon,
then on such date Borrower shall provide to Silicon cash collateral in an amount
equal to the face amount of all such Letters of Credit plus all interest, fees
and cost due or to become due in connection therewith, to secure all of the
Obligations relating to said Letters of Credit, pursuant to Silicon's then
standard form cash pledge agreement.  Notwithstanding any termination of this
Agreement, all of Silicon's security interests in all of the Collateral and all
of the terms and provisions of this Agreement shall continue in full force and
effect until all Obligations have been paid and performed in full; provided
that, without limiting the fact that Loans are subject to the discretion of
Silicon, Silicon may, in its sole discretion, refuse to make any further Loans
after termination.  No termination shall in any way affect or impair any right
or remedy of Silicon, nor shall any such termination relieve Borrower of any
Obligation to Silicon, until all of the Obligations have been paid and performed
in full.  Upon payment and performance in full of all the Obligations and
termination of this Agreement, Silicon shall promptly deliver to Borrower
termination statements, requests for reconveyances and such other documents as
may be required to fully terminate Silicon's security interests.

7.  EVENTS OF DEFAULT AND REMEDIES.

  7.1  EVENTS OF DEFAULT.  The  occurrence of any of the following events shall
constitute an "Event of Default" under this Agreement, and Borrower shall give
Silicon immediate written notice thereof: (a) Any warranty, representation,
statement, report or certificate made or delivered to Silicon by Borrower or any
of Borrower's officers, employees or agents, now or in the future, shall be
untrue or misleading in a material respect; or (b) Borrower shall fail to pay
when due any Loan or any interest thereon or any other monetary Obligation; or
(c) the total Loans and other Obligations outstanding at any time shall exceed
the Credit Limit; or (d) Borrower shall fail to comply with any of the financial
covenants set forth in the Schedule or shall fail to perform any other non-
monetary Obligation which by its nature cannot be cured; or (e) Borrower shall
fail to perform any other non-monetary Obligation, which failure is not cured
within 5 Business Days after the date due; or (f) Any levy, assessment,
attachment, seizure, lien or encumbrance (other than a Permitted Lien) is made
on all or any part of the Collateral which is not cured within 10 days after the
occurrence of the same; or (g) any default or event of default occurs under any
obligation secured by a Permitted Lien securing indebtedness of more than
$25,000, which is not cured within any applicable cure period or waived in
writing by the holder of the Permitted Lien; or (h) Borrower breaches any
material contract or obligation, which has or may reasonably be expected to
have a material adverse effect on Borrower's business or financial condition;
or (i) Dissolution, termination of existence, insolvency or business failure
of Borrower; or appointment of a receiver, trustee or custodian, for all or
any part of the property of, assignment for the benefit of creditors by, or
the commencement of any proceeding by Borrower under any reorganization,
bankruptcy, insolvency, arrangement, readjustment of debt, dissolution or
liquidation law or statute of any jurisdiction, now or in the future in
effect; or (j) the commencement of any proceeding against Borrower or any
guarantor of any of the Obligations under any reorganization, bankruptcy,
insolvency, arrangement, readjustment of debt, dissolution or liquidation law
or statute of any juris-

                                      -6-
<PAGE>
 
diction, now or in the future in effect, which is not cured
by the dismissal thereof within 30 days after the date commenced; or (k)
revocation or termination of, or limitation or denial of liability upon, any
guaranty of the Obligations or any attempt to do any of the foregoing, or
commencement of proceedings by any guarantor of any of the Obligations under any
bankruptcy or insolvency law; or (l) revocation or termination of, or limitation
or denial of liability upon, any pledge of any certificate of deposit,
securities or other property or asset of any kind pledged by any third party to
secure any or all of the Obligations, or any attempt to do any of the foregoing,
or commencement of proceedings by or against any such third party under any
bankruptcy or insolvency law; or (m) Borrower makes any payment on account of
any indebtedness or obligation which has been subordinated to the Obligations
other than as permitted in the applicable subordination agreement, or if any
Person who has subordinated such indebtedness or obligations terminates or in
any way limits his subordination agreement; or (n); or (o) Borrower shall
generally not pay its debts as they become due, or Borrower shall conceal,
remove or transfer any part of its property, with intent to hinder, delay or
defraud its creditors, or make or suffer any transfer of any of its property
which may be fraudulent under any bankruptcy, fraudulent conveyance or similar
law; or (p) there shall be a material adverse change in Borrower's business or
financial condition; or (q). Silicon may cease making any Loans hereunder during
any of the above cure periods, and thereafter if an Event of Default has
occurred.

  7.2  REMEDIES.  Upon the occurrence and during the continuance of any Event
of Default, and at any time thereafter, Silicon, at its option, and without
notice or demand of any kind (all of which are hereby expressly waived by
Borrower), may do any one or more of the following: (a) Cease making Loans or
otherwise extending credit to Borrower under this Agreement or any other
document or agreement; (b) Accelerate and declare all or any part of the
Obligations to be immediately due, payable, and performable, notwithstanding
any deferred or installment payments allowed by any instrument evidencing or
relating to any Obligation; (c) Take possession of any or all of the
Collateral wherever it may be found, and for that purpose Borrower hereby
authorizes Silicon without judicial process to enter onto any of Borrower's
premises without interference to search for, take possession of, keep, store,
or remove any of the Collateral, and remain on the premises or cause a
custodian to remain on the premises in exclusive control thereof, without
charge for so long as Silicon deems it reasonably necessary in order to
complete the enforcement of its rights under this Agreement or any other
agreement; provided, however, that should Silicon seek to take possession of
any of the Collateral by Court process, Borrower hereby irrevocably waives:
(i) any bond and any surety or security relating thereto required by any
statute, court rule or otherwise as an incident to such possession; (ii) any
demand for possession prior to the commencement of any suit or action to
recover possession thereof; and (iii) any requirement that Silicon retain
possession of, and not dispose of, any such Collateral until after trial or
final judgment; (d) Require Borrower to assemble any or all of the Collateral
and make it available to Silicon at places designated by Silicon which are
reasonably convenient to Silicon and Borrower, and to remove the Collateral to
such locations as Silicon may deem advisable; (e) Complete the processing,
manufacturing or repair of any Collateral prior to a disposition thereof and,
for such purpose and for the purpose of removal, Silicon shall have the right
to use Borrower's premises, vehicles, hoists, lifts, cranes, equipment and all
other property without charge; (f) Sell, lease or otherwise dispose of any of
the Collateral, in its condition at the time Silicon obtains possession of it
or after further manufacturing, processing or repair, at one or more public
and/or private sales, in lots or in bulk, for cash, exchange or other
property, or on credit, and to adjourn any such sale from time to time without
notice other than oral announcement at the time scheduled for sale. Silicon
shall have the right to conduct such disposition on Borrower's premises
without charge, for such time or times as Silicon deems reasonable, or on
Silicon's premises, or elsewhere and the Collateral need not be located at the
place of disposition. Silicon may directly or through any affiliated company
purchase or lease any Collateral at any such public disposition, and if
permissible under applicable law, at any private disposition. Any sale or
other disposition of Collateral shall not relieve Borrower of any liability
Borrower may have if any Collateral is defective as to title or physical
condition or otherwise at the time of sale; (g) Demand payment of, and collect
any Receivables and General Intangibles comprising Collateral and, in
connection therewith, Borrower irrevocably authorizes Silicon to endorse or
sign Borrower's name on all collections, receipts, instruments and other
documents, to take possession of and open mail addressed to Borrower and
remove therefrom payments made with respect to any item of the Collateral or
proceeds thereof, and, in Silicon's sole discretion, to grant extensions of
time to pay, compromise claims and settle Receivables and the like for less
than face value; (h) Offset against any sums in any of

                                      -7-
<PAGE>
 
Borrower's general, special or other Deposit Accounts with Silicon; and (i)
Demand and receive possession of any of Borrower's federal and state income tax
returns and the books and records utilized in the preparation thereof or
referring thereto.  All reasonable attorneys' fees, expenses, costs, liabilities
and obligations incurred by Silicon with respect to the foregoing shall be added
to and become part of the Obligations, shall be due on demand, and shall bear
interest at a rate equal to the highest interest rate applicable to any of the
Obligations.  Without limiting any of Silicon's rights and remedies, from and
after the occurrence of any Event of Default, the interest rate applicable to
the Obligations shall be increased by an additional four percent per annum.

  7.3  STANDARDS FOR DETERMINING COMMERCIAL REASONABLENESS.  Borrower and
Silicon agree that a sale or other disposition (collectively, "sale") of any
Collateral which complies with the following standards and applicable law will
conclusively be deemed to be commercially reasonable: (i) Notice of the sale
is given to Borrower at least seven days prior to the sale, and, in the case
of a public sale, notice of the sale is published at least seven days before
the sale in a newspaper of general circulation in the county where the sale is
to be conducted; (ii) Notice of the sale describes the collateral in general,
non-specific terms; (iii) The sale is conducted at a place designated by
Silicon, with or without the Collateral being present; (iv) The sale commences
at any time between 8:00 a.m. and 6:00 p.m; (v) Payment of the purchase price
in cash or by cashier's check or wire transfer is required; (vi) With respect
to any sale of any of the Collateral, Silicon may (but is not obligated to)
direct any prospective purchaser to ascertain directly from Borrower any and
all information concerning the same. Silicon shall be free to employ other
methods of noticing and selling the Collateral, in its discretion, if they are
commercially reasonable.

  7.4  POWER OF ATTORNEY.  Upon the occurrence and during the continuance of
any Event of Default, without limiting Silicon's other rights and remedies,
Borrower grants to Silicon an irrevocable power of attorney coupled with an
interest, authorizing and permitting Silicon (acting through any of its
employees, attorneys or agents) at any time, at its option, but without
obligation, with or without notice to Borrower, and at Borrower's expense, to
do any or all of the following, in Borrower's name or otherwise, but Silicon
agrees to exercise the following powers in a commercially reasonable manner:
(a) Execute on behalf of Borrower any documents that Silicon may, in its sole
discretion, deem advisable in order to perfect and maintain Silicon's security
interest in the Collateral, or in order to exercise a right of Borrower or
Silicon, or in order to fully consummate all the transactions contemplated
under this Agreement, and all other present and future agreements; (b) Execute
on behalf of Borrower any document exercising, transferring or assigning any
option to purchase, sell or otherwise dispose of or to lease (as lessor or
lessee) any real or personal property which is part of Silicon's Collateral or
in which Silicon has an interest; (c) Execute on behalf of Borrower, any
invoices relating to any Receivable, any draft against any Account Debtor and
any notice to any Account Debtor, any proof of claim in bankruptcy, any Notice
of Lien, claim of mechanic's, materialman's or other lien, or assignment or
satisfaction of mechanic's, materialman's or other lien; (d) Take control in
any manner of any cash or non-cash items of payment or proceeds of Collateral;
endorse the name of Borrower upon any instruments, or documents, evidence of
payment or Collateral that may come into Silicon's possession; (e) Endorse all
checks and other forms of remittances received by Silicon; (f) Pay, contest or
settle any lien, charge, encumbrance, security interest and adverse claim in
or to any of the Collateral, or any judgment based thereon, or otherwise take
any action to terminate or discharge the same; (g) Grant extensions of time to
pay, compromise claims and settle Receivables and General Intangibles for less
than face value and execute all releases and other documents in connection
therewith; (h) Pay any sums required on account of Borrower's taxes or to
secure the release of any liens therefor, or both; (i) Settle and adjust, and
give releases of, any insurance claim that relates to any of the Collateral
and obtain payment therefor; (j) Instruct any third party having custody or
control of any books or records belonging to, or relating to, Borrower to give
Silicon the same rights of access and other rights with respect thereto as
Silicon has under this Agreement; and (k) Take any action or pay any sum
required of Borrower pursuant to this Agreement and any other present or
future agreements. Any and all reasonable sums paid and any and all reasonable
costs, expenses, liabilities, obligations and attorneys' fees incurred by
Silicon with respect to the foregoing shall be added to and become part of the
Obligations, shall be payable on demand, and shall bear interest at a rate
equal to the highest interest rate applicable to any of the Obligations. In no
event shall Silicon's rights under the foregoing power of attorney or any of
Silicon's other rights under this Agreement be deemed to indicate that Silicon
is in control of the business, management or properties of Borrower.

  7.5  APPLICATION OF PROCEEDS.  All proceeds realized as the result of any sale
of the Collateral shall be applied by Silicon first to the reasonable costs,
expenses, liabilities, obligations and attorneys' fees incurred by Silicon in
the exercise of its rights under this Agreement, second to the interest due upon
any of the Obligations, and third to the principal of the Obligations, in such
order as Silicon shall determine in its sole discretion.  Any surplus shall be
paid to Borrower or other persons legally entitled thereto; Borrower shall
remain liable to Silicon for any deficiency.  If, Silicon, in its sole
discretion, directly or indirectly enters into a deferred payment or other
credit transaction with any purchaser at any sale of Collateral, Silicon shall
have the option, exercisable at any time, in 

                                      -8-
<PAGE>
 
its sole discretion, of either reducing the Obligations by the principal
amount of purchase price or deferring the reduction of the Obligations until
the actual receipt by Silicon of the cash therefor.

  7.6  REMEDIES CUMULATIVE.  In addition to the rights and remedies set forth in
this Agreement, Silicon shall have all the other rights and remedies accorded a
secured party under the California Uniform Commercial Code and under all other
applicable laws, and under any other instrument or agreement now or in the
future entered into between Silicon and Borrower, and all of such rights and
remedies are cumulative and none is exclusive.  Exercise or partial exercise by
Silicon of one or more of its rights or remedies shall not be deemed an
election, nor bar Silicon from subsequent exercise or partial exercise of any
other rights or remedies.  The failure or delay of Silicon to exercise any
rights or remedies shall not operate as a waiver thereof, but all rights and
remedies shall continue in full force and effect until all of the Obligations
have been fully paid and performed.

8.  DEFINITIONS.  AS USED IN THIS AGREEMENT, THE FOLLOWING TERMS HAVE THE
FOLLOWING MEANINGS:

    "Account Debtor" means the obligor on a Receivable.
     --------------                                    

    "Affiliate" means, with respect to any Person, a relative, partner,
     ---------                                                         
shareholder, director, officer, or employee of such Person, or any parent or
subsidiary of such Person, or any Person controlling, controlled by or under
common control with such Person.

    "Business Day" means a day on which Silicon is open for business.
     ------------                                                    

    "Code" means the Uniform Commercial Code as adopted and in effect in the
     ----
State of California from time to time.

    "Collateral" has the meaning set forth in Section 2.1 above.
     ----------                                                 

    "Default" means any event which with notice or passage of time or both,
     -------
would constitute an Event of Default.

    "Deposit Account" has the meaning set forth in Section 9105 of the Code.
     ---------------                                                        

    "Eligible Inventory"  [NOT APPLICABLE].
     ------------------                    

    "Eligible Receivables" means Receivables arising in the ordinary course of
     --------------------                                                     
Borrower's business from the sale of goods or rendition of services, which
Silicon, in its good faith business judgment, shall deem eligible for
borrowing, based on such considerations as Silicon may from time to time deem
appropriate. Without limiting the fact that the determination of which
Receivables are eligible for borrowing is a matter of Silicon's good faith
business judgment, the following (the "Minimum Eligibility Requirements") are
                                       -------------------------------- 
the minimum requirements for a Receivable to be an Eligible Receivable unless
Silicon consents to a change thereto in writing: (i) the Receivable must not
be outstanding for more than 90 days from its invoice date, (ii) the
Receivable must not represent progress billings, or be due under a fulfillment
or requirements contract with the Account Debtor, (iii) the Receivable must
not be subject to any contingencies (including Receivables arising from sales
on consignment, guaranteed sale or other terms pursuant to which payment by
the Account Debtor may be conditional), (iv) the Receivable must not be owing
from an Account Debtor with whom the Borrower has any dispute (whether or not
relating to the particular Receivable), (v) the Receivable must not be owing
from an Affiliate of Borrower (except that Shaw Communications shall not be
deemed to be an "Affiliate" for purposes of this clause), (vi) the Receivable
must not be owing from an Account Debtor which is subject to any insolvency or
bankruptcy proceeding, or whose financial condition is not acceptable to
Silicon, or which, fails or goes out of a material portion of its business,
(vii) the Receivable must not be owing from the United States or any
department, agency or instrumentality thereof (unless there has been
compliance, to Silicon's satisfaction, with the United States Assignment of
Claims Act), (viii) the Receivable must not be owing from an Account Debtor
located outside the United States or Canada (unless pre-approved by Silicon in
its discretion in writing, or backed by a letter of credit satisfactory to
Silicon, or FCIA insured satisfactory to Silicon), (ix) the Receivable must
not be owing from an Account Debtor to whom Borrower is or may be liable for
goods purchased from such Account Debtor or otherwise. Receivables owing from
one Account Debtor will not be deemed Eligible Receivables to the extent they
exceed 25% of the total eligible Receivables outstanding. In addition, if more
than 50% of the Receivables owing from an Account Debtor are outstanding more
than 90 days from their invoice date (without regard to unapplied credits) or
are otherwise not eligible Receivables, then all Receivables owing from that
Account Debtor will be deemed ineligible for borrowing. Silicon may, from time
to time, in its discretion, revise the Minimum Eligibility Requirements, upon
written notice to the Borrower.
  
    "Equipment" means all of Borrower's present and hereafter acquired
     ---------
machinery, molds, machine tools, motors, furniture, equipment, furnishings,
fixtures, trade fixtures, motor vehicles, tools, parts, dyes, jigs, goods and
other tangible personal property (other than Inventory) of every kind and
description used in Borrower's operations or owned by Borrower and any interest
in any of the foregoing, and all attachments, accessories, accessions,
replacements, substitutions, additions or improvements to any of the foregoing,
wherever located.

    "Event of Default" means any of the events set forth in Section 7.1 of this
     ----------------                                                          
Agreement.

    "General Intangibles" means all general intangibles of Borrower, whether now
     -------------------                                                        
owned or hereafter created or acquired by Borrower, including, without
limitation, all 

                                      -9-
<PAGE>
 
choses in action, causes of action, corporate or other business records,
Deposit Accounts, inventions, designs, drawings, blueprints, patents, patent
applications, trademarks and the goodwill of the business symbolized thereby,
names, trade names, trade secrets, goodwill, copyrights, registrations,
licenses, franchises, customer lists, security and other deposits, rights in
all litigation presently or hereafter pending for any cause or claim (whether
in contract, tort or otherwise), and all judgments now or hereafter arising
therefrom, all claims of Borrower against Silicon, rights to purchase or sell
real or personal property, rights as a licensor or licensee of any kind,
royalties, telephone numbers, proprietary information, purchase orders, and
all insurance policies and claims (including without limitation life
insurance, key man insurance, credit insurance, liability insurance, property
insurance and other insurance), tax refunds and claims, computer programs,
discs, tapes and tape files, claims under guaranties, security interests or
other security held by or granted to Borrower, all rights to indemnification
and all other intangible property of every kind and nature (other than
Receivables).

  "Inventory" means all of Borrower's now owned and hereafter acquired goods,
   ---------                                                                 
merchandise or other personal property, wherever located, to be furnished under
any contract of service or held for sale or lease (including without limitation
all raw materials, work in process, finished goods and goods in transit), and
all materials and supplies of every kind, nature and description which are or
might be used or consumed in Borrower's business or used in connection with the
manufacture, packing, shipping, advertising, selling or finishing of such goods,
merchandise or other personal property, and all warehouse receipts, documents of
title and other documents representing any of the foregoing.

  "Obligations" means all present and future Loans, advances, debts,
   -----------                                                      
liabilities, obligations, guaranties, covenants, duties and indebtedness at any
time owing by Borrower to Silicon, whether evidenced by this Agreement or any
note or other instrument or document, whether arising from an extension of
credit, opening of a letter of credit, banker's acceptance, loan, guaranty,
indemnification or otherwise, whether direct or indirect (including, without
limitation, those acquired by assignment and any participation by Silicon in
Borrower's debts owing to others), absolute or contingent, due or to become due,
including, without limitation, all interest, charges, expenses, fees, attorney's
fees, expert witness fees, audit fees, letter of credit fees, collateral
monitoring fees, closing fees, facility fees, termination fees, minimum interest
charges and any other sums chargeable to Borrower under this Agreement or under
any other present or future instrument or agreement between Borrower and
Silicon.

  "Permitted Liens" means the following:  (i) purchase money security interests
   ---------------                                                             
in specific items of Equipment; (ii) leases of specific items of Equipment;
(iii) liens for taxes not yet payable; (iv) additional security interests and
liens consented to in writing by Silicon, which consent shall not be
unreasonably withheld; (v) security interests being terminated substantially
concurrently with this Agreement; (vi) liens of materialmen, mechanics,
warehousemen, carriers, or other similar liens arising in the ordinary course of
business and securing obligations which are not delinquent; (vii) liens incurred
in connection with the extension, renewal or refinancing of the indebtedness
secured by liens of the type described above in clauses (i) or (ii) above,
provided that any extension, renewal or replacement lien is limited to the
property encumbered by the existing lien and the principal amount of the
indebtedness being extended, renewed or refinanced does not increase; (viii)
Liens in favor of customs and revenue authorities which secure payment of
customs duties in connection with the importation of goods.  Silicon will have
the right to require, as a condition to its consent under subparagraph (iv)
above, that the holder of the additional security interest or lien sign an
intercreditor agreement on Silicon's then standard form, acknowledge that the
security interest is subordinate to the security interest in favor of Silicon,
and agree not to take any action to enforce its subordinate security interest so
long as any Obligations remain outstanding, and that Borrower agree that any
uncured default in any obligation secured by the subordinate security interest
shall also constitute an Event of Default under this Agreement.

  "Person" means any individual, sole proprietorship, partnership, joint
   ------                                                               
venture, trust, unincorporated organization, association, corporation,
government, or any agency or political division thereof, or any other entity.

  "Receivables" means all of Borrower's now owned and hereafter acquired
   -----------                                                          
accounts (whether or not earned by performance), letters of credit, contract
rights, chattel paper, instruments, securities, documents and all other forms of
obligations at any time owing to Borrower, all guaranties and other security
therefor, all merchandise returned to or repossessed by Borrower, and all rights
of stoppage in transit and all other rights or remedies of an unpaid vendor,
lienor or secured party.

  "Reserves" means, as of any date of determination, such amounts as Silicon may
   --------                                                                     
from time to time establish and revise in good faith reducing the amount of
Loans and Letters of Credit which would otherwise be available to Borrower under
the lending formula(s) provided in the Schedule:  (a) to reflect events,
conditions, contingencies or risks which, as determined by Silicon in good
faith, do or may affect either (i) the Collateral or any other property which is
security for the Obligations or its value, (ii) the assets, business or
prospects of Borrower or any Guarantor or (iii) the security interests and other
rights of Silicon in the Collateral (including the enforceability, perfection
and priority thereof), or (b) to reflect Silicon's good faith belief that any
collateral report or financial information furnished by or on behalf of Borrower
or any Guarantor to Silicon is or may have been incomplete, inaccurate or
misleading in any material respect, or (c) in respect of any state of facts
which Silicon determines 

                                      -10-
<PAGE>
 
in good faith constitutes an Event of Default or may, with notice or passage
of time or both, constitute an Event of Default.

  Other Terms.  All accounting terms used in this Agreement, unless otherwise
  -----------                                                                
indicated, shall have the meanings given to such terms in accordance with
generally accepted accounting principles, consistently applied.  All other terms
contained in this Agreement, unless otherwise indicated, shall have the meanings
provided by the Code, to the extent such terms are defined therein.

9.  GENERAL PROVISIONS.

  9.1  INTEREST COMPUTATION.  In computing interest on the Obligations, all
checks, wire transfers and other items of payment received by Silicon (including
proceeds of Receivables and payment of the Obligations in full) shall be deemed
applied by Silicon on account of the Obligations three Business Days after
receipt by Silicon of immediately available funds, and, for purposes of the
foregoing, any such funds received after 12:00 Noon on any day shall be deemed
received on the next Business Day.  Silicon shall not, however, be required to
credit Borrower's account for the amount of any item of payment which is
unsatisfactory to Silicon in its sole discretion, and Silicon may charge
Borrower's loan account for the amount of any item of payment which is returned
to Silicon unpaid.

  9.2  APPLICATION OF PAYMENTS.  All payments with respect to the Obligations
may be applied, and in Silicon's sole discretion reversed and re-applied, to the
Obligations, in such order and manner as Silicon shall determine in its sole
discretion.

  9.3  CHARGES TO ACCOUNTS.  Silicon may, in its discretion, require that
Borrower pay monetary Obligations in cash to Silicon, or charge them to
Borrower's Loan account, in which event they will bear interest at the same rate
applicable to the Loans.  Silicon may also, in its discretion, charge any
monetary Obligations to Borrower's Deposit Accounts maintained with Silicon, 
and Silicon shall promptly notify Borrower of any such charge to Borrower's
Deposit Accounts.

  9.4  MONTHLY ACCOUNTINGS.  Silicon shall provide Borrower monthly with an
account of advances, charges, expenses and payments made pursuant to this
Agreement.  Such account shall absent manifest error be deemed correct,
accurate and binding on Borrower and an account stated (except for reverses
and reapplications of payments made and corrections of errors discovered by
Silicon), unless Borrower notifies Silicon in writing to the contrary within
thirty days after each account is rendered, describing the nature of any
alleged errors or admissions.

  9.5  NOTICES.  All notices to be given under this Agreement shall be in
writing and shall be given either personally or by reputable private delivery
service or by regular first-class mail, or certified mail return receipt
requested, addressed to Silicon or Borrower at the addresses shown in the
heading to this Agreement, or at any other address designated in writing by one
party to the other party.  Notices to Silicon shall be directed to the
Commercial Finance Division, to the attention of the Division Manager or the
Division Credit Manager.  All notices shall be deemed to have been given upon
delivery in the case of notices personally delivered, or at the expiration of
one Business Day following delivery to the private delivery service, or two
Business Days following the deposit thereof in the United States mail, with
postage prepaid.

  9.6  SEVERABILITY.  Should any provision of this Agreement be held by any
court of competent jurisdiction to be void or unenforceable, such defect shall
not affect the remainder of this Agreement, which shall continue in full force
and effect.

  9.7  INTEGRATION.  This Agreement and such other written agreements, documents
and instruments as may be executed in connection herewith are the final, entire
and complete agreement between Borrower and Silicon and supersede all prior and
contemporaneous negotiations and oral representations and agreements, all of
which are merged and integrated in this Agreement.  There are no oral
                                                    -----------------
understandings, representations or agreements between the parties which are not
-------------------------------------------------------------------------------
set forth in this Agreement or in other written agreements signed by the parties
--------------------------------------------------------------------------------
in connection herewith. Notwithstanding the foregoing, the commitments set 
-----------------------
forth in the letter agreement dated July 7, 1998 under the heading "Facility
B" and in the letter agreement dated July 8, 1998 concerning "A $5,000,000
Senior Secured Subordinated Loan Facility" remain in full force and effect and
are not superseded by this Agreement.

  9.8  WAIVERS.  The failure of Silicon at any time or times to require Borrower
to strictly comply with any of the provisions of this Agreement or any other
present or future agreement between Borrower and Silicon shall not waive or
diminish any right of Silicon later to demand and receive strict compliance
therewith.  Any waiver of any default shall not waive or affect any other
default, whether prior or subsequent, and whether or not similar.  None of the
provisions of this Agreement or any other agreement now or in the future
executed by Borrower and delivered to Silicon shall be deemed to have been
waived by any act or knowledge of Silicon or its agents or employees, but only
by a specific written waiver signed by an authorized officer of Silicon and
delivered to Borrower.  Borrower waives demand, protest, notice of protest and
notice of default or dishonor, notice of payment and nonpayment, release,
compromise, settlement, extension or renewal of any commercial paper,
instrument, account, General Intangible, document or guaranty at any time held
by Silicon on which Borrower is or may in any way be liable, and notice of 

                                      -11-
<PAGE>
 
any action taken by Silicon, unless expressly required by this Agreement.

  9.9  NO LIABILITY FOR ORDINARY NEGLIGENCE.  Neither Silicon, nor any of its
directors, officers, employees, agents, attorneys or any other Person affiliated
with or representing Silicon shall be liable for any claims, demands, losses or
damages, of any kind whatsoever, made, claimed, incurred or suffered by Borrower
or any other party through the ordinary negligence of Silicon, or any of its
directors, officers, employees, agents, attorneys or any other Person affiliated
with or representing Silicon, but nothing herein shall relieve Silicon from
liability for its own gross negligence or willful misconduct.

  9.10 AMENDMENT.  The terms and provisions of this Agreement may not be waived
or amended, except in a writing executed by Borrower and a duly authorized
officer of Silicon.

  9.11 TIME OF ESSENCE.  Time is of the essence in the performance by Borrower
of each and every obligation under this Agreement.

  9.12 ATTORNEYS FEES AND COSTS.  Borrower shall reimburse Silicon for all
reasonable attorneys' fees and all filing, recording, search, title insurance,
appraisal, audit, and other reasonable costs incurred by Silicon, pursuant to,
or in connection with, or relating to this Agreement (whether or not a lawsuit
is filed), including, but not limited to, any reasonable attorneys' fees and
costs Silicon incurs in order to do the following: prepare and negotiate this
Agreement and the documents relating to this Agreement; obtain legal advice in
connection with this Agreement or Borrower; enforce, or seek to enforce, any of
its rights; prosecute actions against, or defend actions by, Account Debtors;
commence, intervene in, or defend any action or proceeding; initiate any
complaint to be relieved of the automatic stay in bankruptcy; file or prosecute
any probate claim, bankruptcy claim, third-party claim, or other claim; examine,
audit, copy, and inspect any of the Collateral or any of Borrower's books and
records; protect, obtain possession of, lease, dispose of, or otherwise enforce
Silicon's security interest in, the Collateral; and otherwise represent Silicon
in any litigation relating to Borrower.  In satisfying Borrower's obligation
                                         -----------------------------------
hereunder to reimburse Silicon for attorneys fees, Borrower may, for
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convenience, issue checks directly to Silicon's attorneys, Levy, Small & Lallas,
--------------------------------------------------------------------------------
but Borrower acknowledges and agrees that Levy, Small & Lallas is representing
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only Silicon and not Borrower in connection with this Agreement.  If either
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Silicon or Borrower files any lawsuit against the other predicated on a breach
of this Agreement, the prevailing party in such action shall be entitled to
recover its reasonable costs and attorneys' fees, including (but not limited to)
reasonable attorneys' fees and costs incurred in the enforcement of, execution
upon or defense of any order, decree, award or judgment.  All attorneys' fees
and costs to which Silicon may be entitled pursuant to this Paragraph shall
immediately become part of Borrower's Obligations, shall be due on demand, and
shall bear interest at a rate equal to the highest interest rate applicable to
any of the Obligations.

  9.13 BENEFIT OF AGREEMENT.  The provisions of this Agreement shall be binding
upon and inure to the benefit of the respective successors, assigns, heirs,
beneficiaries and representatives of Borrower and Silicon; provided, however,
that Borrower may not assign or transfer any of its rights under this Agreement
without the prior written consent of Silicon, and any prohibited assignment
shall be void.  No consent by Silicon to any assignment shall release Borrower
from its liability for the Obligations.

  9.14 JOINT AND SEVERAL LIABILITY.  If Borrower consists of more than one
Person, their liability shall be joint and several, and the compromise of any
claim with, or the release of, any Borrower shall not constitute a compromise
with, or a release of, any other Borrower.

  9.15 LIMITATION OF ACTIONS.  Any claim or cause of action by Borrower against
Silicon, its directors, officers, employees, agents, accountants or attorneys,
based upon, arising from, or relating to this Loan Agreement, or any other
present or future document or agreement, or any other transaction contemplated
hereby or thereby or relating hereto or thereto, or any other matter, cause or
thing whatsoever, occurred, done, omitted or suffered to be done by Silicon, its
directors, officers, employees, agents, accountants or attorneys, shall be
barred unless asserted by Borrower by the commencement of an action or
proceeding in a court of competent jurisdiction by the filing of a complaint
within two years after the first act, occurrence or omission upon which such
claim or cause of action, or any part thereof, is based, and the service of a
summons and complaint on an officer of Silicon, or on any other person
authorized to accept service on behalf of Silicon, within thirty (30) days
thereafter.  Borrower agrees that such two-year period is a reasonable and
sufficient time for Borrower to investigate and act upon any such claim or cause
of action.  The two-year period provided herein shall not be waived, tolled,
or extended except by the written consent of Silicon in its sole discretion.
This provision shall survive any termination of this Loan Agreement or any other
present or future agreement.

  9.16  PARAGRAPH HEADINGS; CONSTRUCTION.  Paragraph headings are only used in
this Agreement for convenience.  Borrower and Silicon acknowledge that the
headings may not describe completely the subject matter of the applicable
paragraph, and the headings shall not be used in any manner to construe, limit,
define or interpret any term or provision of this Agreement.  The term
"including", whenever used in this Agreement, shall mean "including (but not
limited to)".  This Agreement has been fully reviewed and negotiated between the
parties and no uncertainty or ambiguity in any term or provision of this
Agreement shall be construed strictly against Silicon or Borrower under any rule
of construction or otherwise.

                                      -12-
<PAGE>
 
  9.17  GOVERNING LAW; JURISDICTION; VENUE.  This Agreement and all acts and
transactions hereunder and all rights and obligations of Silicon and Borrower
shall be governed by the laws of the State of California.  As a material part of
the consideration to Silicon to enter into this Agreement, Borrower (i) agrees
that all actions and proceedings relating directly or indirectly to this
Agreement shall, at Silicon's option, be litigated in courts located within
California, and that the exclusive venue therefor shall be Santa Clara County;
(ii) consents to the jurisdiction and venue of any such court and consents to
service of process in any such action or proceeding by personal delivery or any
other method permitted by law; and (iii) waives any and all rights Borrower may
have to object to the jurisdiction of any such court, or to transfer or change
the venue of any such action or proceeding.

  9.18  MUTUAL WAIVER OF JURY TRIAL.  BORROWER AND SILICON EACH HEREBY WAIVE THE
RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT OF,
OR IN ANY WAY RELATING TO, THIS AGREEMENT OR ANY OTHER PRESENT OR FUTURE
INSTRUMENT OR AGREEMENT BETWEEN SILICON AND BORROWER, OR ANY CONDUCT, ACTS OR
OMISSIONS OF SILICON OR BORROWER OR ANY OF THEIR DIRECTORS, OFFICERS, EMPLOYEES,
AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH SILICON OR BORROWER, IN
ALL OF THE FOREGOING CASES, WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE.

 BORROWER:

     TERAYON COMMUNICATION SYSTEMS, INC.


     BY_______________________________
         PRESIDENT OR VICE PRESIDENT

     BY_______________________________
         SECRETARY OR ASS'T SECRETARY

 SILICON:

     SILICON VALLEY BANK


     BY_______________________________
     TITLE______________________________

                                      -13-